2013 (8) TMI 829 - AT - Income Tax

Disallowance of interest on securities - CIT deleted disallowance made by A.O. - Whether in the case of Government securities, interest accrues on day to day basis or only on the coupon dates - Held that - assessee cannot prepare the computation of its income for income tax purposes in a manner different from the method under which it keeps accounts - Assessee cannot be prevented from urging in the return that the interest on govt. securities accrued only on the specified coupon dates notwithstanding that credit has been taken in the profit & loss account for the interest on day to day basis - interest accrues only on the specified coupon dates and not on day to day basis - Following decision of Indusind Bank Limited Versus The Addl. CIT, Range 2(3), Mumbai. 2011 (1) TMI 1244 - ITAT MUMBAI - Decided in favour of assessee. Reduction of claim of bad debt under section 36(1)(vii) - Held that - In the first place, the ad hoc deduction under s. 36(1)(viia) (b) being the last item on the computation of taxable business profits, it cannot be taken into account at the time of allowing deduction under s 36(1)(vii), and, to that extent, the actual deduction attributable to bad debts i.e. 36(1)(vii) plus 36)(1)(vii)(b) will indeed be more than the actual bad debts in that year However, since the provision so allowed under s 36(1)(viia)(b) is be taken into account while allowing deduction for actual bad debts in the subsequent year, the effect of excess deduction, if any, will be squared up in that subsequent year. Secondly, a view seems perfectly acceptable that the provision for bad debts allowable under s. 36(1)(viia)(b) being inherently attributable to the debts outstanding at the end of the year, provision allowable as such is against future bad debts out of debts outstanding at the year end, and, therefore, It need not he mixed up with actual bad debts incurred during the year. - AO to compute deduction allowable on account of bad debt in line with the decision of the Tribunal in case of Oman International Bank, SAOG vs. DCIT 2003 (11) TMI 286 - ITAT BOMBAY-H and M/s INDUSIND BANK LTD. Versus ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 2(3), MUMBAI 2011 (1) TMI 1244 - ITAT MUMBAI - Decided in favour of assessee. Disallowance of loss on unmatured foreign exchange contracts - One of the due dates fell after the end of the previous year i.e. after 31st March - Held that - where a forward contract is entered into by the assessee to sell the foreign currency at an agreed price at a future date falling beyond the last date of accounting period, the loss is incurred to the assessee on account of evaluation of the contract on the last date of the accounting period i.e. before the date of maturity of the forward contract - Following decision of DCIT vs. Bank of Bahrain and Kuwait (2010 (8) TMI 578 - ITAT, MUMBAI) and M/s INDUSIND BANK LTD. Versus ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 2(3), MUMBAI 2011 (1) TMI 1244 - Decided in favour of assessee.

Issues Involved:
1. Disallowance of interest expenses under section 14A.
2. Disallowance of swap cost.
3. Taxability of interest accrued on securities but not falling due for payment.
4. Disallowance of depreciation on leased assets.
5. Reduction of deduction under section 36(1)(vii).
6. Disallowance of loss on unmatured foreign exchange contracts.

Detailed Analysis:

1. Disallowance of Interest Expenses under Section 14A
Ground No. 1 of Revenue's Appeal and Ground No. 4 of Assessee's Appeal:
The issue concerns the disallowance of Rs. 7,27,80,949/- made by the A.O. under section 14A of the Income Tax Act, 1961, which was sustained by the CIT(A) to the extent of Rs. 21,46,159/-. Both parties agreed that a similar issue for the preceding year (A.Y. 2001-02) was remanded to the A.O. by the Tribunal. Following the Tribunal's decision in earlier years, the issue was restored to the A.O. for fresh adjudication. This was done in light of the Hon'ble Bombay High Court's decision in the case of Godrej Boyce Mfg. Company Ltd. The issue was treated as partly allowed for statistical purposes.

2. Disallowance of Swap Cost
Ground No. 2 of Revenue's Appeal:
The assessee, a banking company, claimed Rs. 2,04,28,235/- as swap cost for foreign currency deposits, which was disallowed by the A.O. on the grounds that it was not proportionate to the period of swap transactions. The CIT(A) allowed the claim after verifying that the amount was indeed proportionate. However, the Tribunal remanded the issue back to the A.O. for verification of the proportionate cost, treating the ground as allowed for statistical purposes.

3. Taxability of Interest Accrued on Securities but Not Falling Due for Payment
Ground No. 1 of Assessee's Appeal:
The assessee challenged the disallowance of Rs. 76,10,78,436/- representing interest accrued on securities but not due for payment. Both parties agreed that the issue was covered in favor of the assessee by the Tribunal's decision for A.Y. 2000-01, which followed the Special Bench decision in the case of DCIT (International Taxation) vs. Bank of Bahrain and Kuwait. The Tribunal held that interest on government securities accrues only on coupon dates, not on a day-to-day basis. The addition made by the A.O. and confirmed by the CIT(A) was deleted, and the ground was allowed.

4. Disallowance of Depreciation on Leased Assets
Ground No. 2 of Assessee's Appeal:
The assessee did not press this ground at the time of hearing. Consequently, the ground was dismissed as not pressed.

5. Reduction of Deduction under Section 36(1)(vii)
Ground No. 3 of Assessee's Appeal:
The issue involved the reduction of deduction for bad debts by Rs. 5,29,01,270/-. The CIT(A) disallowed the deduction on the grounds that the provision for bad debts should be reduced from the bad debts claimed. Both parties agreed that the issue was covered in favor of the assessee by the Tribunal's decision for A.Y. 2000-01, which followed the decision in the case of Oman International Bank SAOG vs. DCIT. The Tribunal reversed the CIT(A)'s decision, allowing the ground.

6. Disallowance of Loss on Unmatured Foreign Exchange Contracts
Ground No. 5 of Assessee's Appeal:
The assessee's claim for loss on unmatured foreign exchange contracts was disallowed by the A.O. and confirmed by the CIT(A). Both parties agreed that the issue was covered in favor of the assessee by the Tribunal's decision for A.Y. 2000-01, which followed the Special Bench decision in the case of DCIT (International Taxation) vs. Bank of Bahrain and Kuwait. The Tribunal deleted the disallowance, allowing the ground.

Conclusion:
The appeal of the assessee was partly allowed, and the appeal of the Revenue was treated as partly allowed. The order was pronounced in the open court on 03rd July 2013.

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